“How Much Long Term Care Insurance Do I Need?”

Tuesday, March 1st, 2011 by Cass Chappell, CFP®

how-much-long-term-care-insurance-do-i-need

 

 

Summary

• The ultimate goal of purchasing a long term care insurance policy is to guard against spending more than your nest egg will allow, thus protecting your, and your family’s, assets.
• Buy an insurance amount equal to the increased spending that may result from the incapacitation NOT the full amount of the cost of the incapacitation.
• It is important to speak with an independent agent about your specific situation, but a good rule of thumb is 2/3 of the “average cost of care” in your area.

Long term care insurance is one of the most important, and often overlooked, financial purchases that a senior can make.  We have previously assisted with information on how LTCI works and when to buy it, but we would now like to focus on how much insurance an individual should purchase.
With policy benefits ranging from $50 a day to as much as $500 per day, it is important to remember why you are purchasing the insurance in the first place.With policy benefits ranging from $50 a day to as much as $500 per day it is important to remember why you are purchasing the insurance in the first place.

The ultimate goal of purchasing a long term care insurance policy is to guard against spending more than your nest egg will allow, thus protecting your, and your family’s, assets.

That is a mouthful.

Allow me to elaborate…

In retirement, the risks that we are faced with are very different than those when we are working.   The risk of losing a job, and thus an income, is gone.  The risk of losing the ability to work (disability) is not applicable.  And, in the case of a husband and wife, the risk of premature death is not a threat to the overall retirement plan.  Strictly financially speaking, the death of a partner, in many cases, will strengthen a retirement spending plan as there is only one person is left to provide for.

Retirees don’t all of the sudden dramatically change their spending habits…unless they HAVE TO.  The incapacitation of one spouse will likely cause a dramatic increase in spending.  Without insurance, the increased spending could cause the nest egg to be depleted prematurely—before both spouses are deceased.  Another byproduct could be a reduced estate to pass to heirs.

You should buy an insurance amount equal to the increased spending that may result from the incapacitation, NOT the full amount of the cost of the incapacitation.

Long term care insurance is often sold using sales literature that shows the “cost of care” in your area.  It is more expensive, for example, to be incapacitated in New York City that it is in Atlanta.  If the average cost of care in my zip code is $60,000 per year, this may only result in a $40,000 increase to my spending.  Whether I was incapacitated or not, I was still going to be spending on many basic things that would be included in that $60,000 number.  I might recommend that this person purchase a policy with a $40,000 per year benefit, or about $115 per day.

It is important to speak with an independent agent about your specific situation, but a good rule of thumb is 2/3 of the “average cost of care” in your area.

This is a very basic explanation of how to determine how much long-term care insurance one might need. For a more detailed, customized answer that fits your specific needs, please consult with your independent insurance advisor.

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